It’s no coincidence that the most successful investor today and, measured in total wealth, of all time is Warren Buffett. His investment vehicle represents permanent capital. It never pays dividends or faces redemptions. On the not infrequent occasions that investors have fretted that he was losing his touch, they simply could sell the shares on the stock exchange to someone who felt otherwise. Buffett isn’t bothered or affected by the ensuing fluctuations in Berkshire Hathaway’s stock price or, for that matter, about the gyrations of the broader stock market overall. He has cited an allegory that his mentor Benjamin Graham put in his classic The Intelligent Investor as the advice that is “most conducive to investment success.”
Graham said one should imagine market prices as coming not from millions of people but a single, emotionally unstable business partner, Mr. Market. Sometimes he’s euphoric and other times despondent. Sometimes he will want to sell you his interest at a low price and other times he will want to buy yours at a ridiculously high one. Luckily, he won’t be offended if you ignore him.
An advisor’s clients may, on the other hand, be offended if he or she urges them to stay the course a bit too stridently. That balance is hard to strike and, despite the memories of "the last time," it never gets easier.
One reason so many investors take the wrong road is that both giddy times and awful ones seem to last just a little bit longer than our patience. That, in turn, leads to a conclusion that Sir John Templeton called the four most dangerous words in investing: “This time is different.” When it comes to extremes of sentiment, it never really is but sure seems that way. As Irving Kahn, who passed away at age 109 the month I began writing my book, said to me eight decades after he had kept his nerve and made a killing in the Great Crash and was about to do so again: “History mostly repeats itself, but it’s never exact.”
Spencer Jakab writes and edits the “Heard on the Street” column for The Wall Street Journal. This article was excerpted from his new book "Heads I Win, Tails I Win." He has also written about investing for the Financial Times, Barron’s, and Dow Jones Newswires.